Locally as well as nationally, the fourth quarter’s big news was the Blackstone Group’s $36 billion bid to buy Equity Office Properties and the prospect of a bidding war.
Blackstone’s bid gave Equity Office motivation to shift focus from keeping buildings full to creating value in its investments.
As a result, it is increasing rents in Orange County by 25 cents to 40 cents per square foot. Equity Office owns 29 properties totaling 5.7 million square feet in OC.
During the fourth quarter, The Irvine Company, the county’s largest landlord, also increased asking rents, which closed the year at record highs,largely a result of new buildings that command higher rates.
A number of other new buildings are scheduled for completion within the next 12 months, including Maguire Properties Inc.’s Park Place and the Irvine Co.’s 20 and 40 Pacifica, Irvine Center Towers, Discovery Business Center and University Research Park.
Hines Interests LP/Crescent Real Estate Equities Co.’s 2211 Michelson, Opus West’s 2050 Main and AEW/Parker Properties LLC’s Summit Office campus also are set to wrap up construction.
More construction is on the horizon. Work has begun on three new Irvine Co. low-rise buildings,totaling 233,000 square feet,at Michelle Drive and Jamboree Road.
Bacchus Development has broken ground on 40 for-sale small offices at the corner of Irvine Center Drive and Lake Forest Drive in Irvine.
Bacchus has an additional 50 for-sale offices planned for another site on Jeffrey Road, also in Irvine. The units will range from 1,000 square feet to 20,000 square feet.
The construction frenzy also is moving northward. A 22-story office tower has been proposed for the Platinum Triangle area around Anaheim Stadium.
If approved, the building will include 572,000 square feet of office space and 15,000 square feet of retail space.
Several other notable sales took place during the fourth quarter. Hines and Buchanan Street Partners teamed up to purchase 2323 Main St.
The 260,000-square-foot site is set to become warehouse/office space after being considered for a large condominium development.
That proposal was contested by a local business that felt condos wouldn’t be suitable next to the business hub.
It also was contested by nearby cities because of the threat of increased traffic.
In another transaction, 1401 Dove St. was bought by Far West Industries for $26.4 million, or $354 per square foot. The six-story, 74,000-square-foot office building was constructed in 1974 and renovated in 2001.
Asking Rents Pushing Up
New buildings, combined with decelerating leasing, have expanded tenant options but also have led to a rise in asking rents as newer buildings dominate availability.
Overall asking rents ended 2006 at $29.26, a 16.2% increase over the year-end rate of $25.19 in 2005. Class A asking rents rose to $32.24 in 2006 from $29.11 in 2005. Class B and C asking rents likewise grew for the year, to $24.48 from $21.60.
Unlike class A asking rents, class B and C asking rents registered a very slight quarterly dip of -0.1%. All submarkets witnessed annual growth in class A asking rents, with South County posting a 26% increase and North County recording a jump of 13.6%.
The gap between class A asking rents in these two submarkets remains at nearly $10, with rates averaging $36.12 in South County and only $26.03 in North County.
Leasing Slowdown, More Options
Even as developers deliver more space to the market, the pace of leasing has slowed, particularly during the past several quarters.
Leasing activity peaked in 2005, with totals ranging from 10 million square feet to 11.1 million square feet. In contrast, activity has slipped below 9 million square feet during the past three quarters.
Class A leasing activity was consistent throughout 2006, averaging 4.5 million square feet and reaching 4.7 million square feet in the fourth quarter.
Nearly 50% of class A leasing activity was concentrated in the airport area, where 2.3 million square feet has been leased during the past four quarters, and South County, where 837,423 square feet has been leased.
It is interesting to note that at least two of the largest transactions in the past two quarters,Arbonne International LLC and LA Fitness International LLC,were for less expensive, short-term sublease space.
Since larger tenants typically don’t want to bother with short-term sublease deals, these transactions could be an indication that tenants believe the market is going to improve.
Availability Rates Rise
Tenants are gradually finding more space options as buildings are completed. The overall availability rate jumped by 1.3% during 2006, increasing to 12.6% from 11.3% in 2005.
An increasing quantity of class A space has driven this growth. Class A availability rose to 14.7% from 10.5% in 2005.
West County, with a 2.1% drop in its class A availability rate, was the only submarket to close 2006 with less class A space.
Contiguous Blocks
Available large blocks of contiguous space (100,000 square feet or more) increased to 23 from 18 during the fourth quarter.
The new blocks are concentrated in two projects, 2050 Main St. and 20 Pacifica.
Analysis by Studley Inc.
